Dive Brief:

• The Financial Accounting Standards Board (FASB) unanimously agreed Wednesday to move forward with a staff recommendation to prioritize a project designed to improve the accounting for and disclosure of certain digital assets by upgrading the issue to its technical agenda.

• “This is a very rapidly evolving asset class that’s currently going through quite wild gyrations,” said FASB member Frederick Cannon during the meeting. But "we have to recognize that this is rapidly evolving and we have to allow for some adaptability of accounting standards to that evolution.”  

• The move signals the board is moving toward setting new standards for crypto assets, marking a change in its stance since October 2020 when it decided against doing so after determining the issue had not met the criteria of being “pervasive.” 

Dive Insight:

Since the board’s 2020 decision to stand back FASB members have come around to recognizing the need for a better crypto accounting model as an increasing number of companies are venturing into the sector and after hearing from a growing groundswell of voices from various stakeholders, including companies, financial statement preparers, politicians and regulators.

Many stakeholders have been critical of the current system which generally treats cryptocurrency as an intangible asset, meaning a firm that holds bitcoin or another digital asset that goes down reflects that drop in its reports but does not do the same if the value rises. Investors in companies stuck with that method of reporting the assets on their balance sheets aren’t fully informed on the valuation, critics say. 

Indeed nearly all of the roughly 500 respondents to FASB’s Invitation to Comment last year supported a move by FASB to allow crypto assets with a “readily determinable fair value” like bitcoin to be measured on a recurring basis at fair value, with realized and unrealized gains and losses recognized in current period earnings, according to a KPMG report. 

Establishing a fair value model for digital assets makes sense but will likely be a challenging and time-consuming process for the board, some board member said. 

“I don’t think our current fair value framework is necessarily easily applied to digital assets,” Cannon said.”There are a number of challenges that the staff recognizes but also that our listeners need to recognize. This isn’t a simple process.” 

FASB Chair Richard Jones said digital assets was an “awfully broad topic” and that it was going to be very important for the board to narrow the scope significantly. He’d like to focus on accounting issues around owned digital assets with no additional features such as ownership rights or rights to services. “I would focus on the plain vanilla cryptocurrency,” he said. 

That the board was taking an official step toward addressing cryptocurrency amid a major slump in valuations was not lost on the members. But board member James Kroeker said the recent volatility pointed to the need for an accounting model that would better reflect changes in value. 

“I suspect if you compared the market cap today from even the date you wrote the memo we’re probably closer to October 2020 in terms of market cap," Kroeker said. "That might be another reason for a model that reflects that volatility not only on the downside but on the upside."

Bitcoin has fallen nearly 30% during the past month.